Big Change for Small Change

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Though cash is still king, a new report says microcommerceelectronic payments of $5 or lessis on the rise.

Cash is still king when it comes to small-ticket purchases at fast food restaurants, convenience stores and the like. But at long last, electronic transactions seem ready to make serious progress in the realm of micropayments, according to a report by James C. McGrath of the Federal Reserve Bank of Philadelphia.

Micropayments are commonly defined as transactions of $5 or less, and they add up to big moneyover $1 trillion a year, spread across 400 billion point-of-sale purchases, including unattended payments at locations like vending machines, parking meters and laundromats.

Yet the cost of electronic micropayment transactions, in time and processing fees, has limited their appeal to merchants, consumers and payment-service providers. Now, says the report, "micropayments are poised to make inroads at the physical point of sale." What's changed? For one thing, online culture (hello, iTunes) has shown merchants just how lucrative aggregated electronic micropayments can be, while services such as PayPal have acclimated consumers to new payment techniques.

Meanwhile, technologies including smart cards and toll-payment systems such as E-Z Pass have habituated consumers to the practice. Credit card companies, sensing opportunity along this long tail of small purchases, have created a lower fee structure for small electronic transactions; some have also made efficient card-readers available to merchants at a discount, which is leading toward a critical mass of the machines in places such as McDonald's restaurants. Other technologies, including payment via cell phone, may prove more popular outside the U.S.

The results could go far beyond a little added convenience in buying a Happy Meal or paying your bus fare. "A move away from coin- and paper-based payments for small purchases is expected not only to further increase the efficiency of the payments system but also to facilitate entirely new types of markets and change the competitive landscape in others," says the report. "Consumers are beginning to consider cards as a viable, and often superior, alternative to cash for small purchases in many different settings," the report says. You want fries with that paradigm shift?